Fitch affirms Ukraine's City of Kyiv at 'CCC'

Fitch has also affirmed the city's senior debt ratings at 'CCC' and 'BBB(ukr)'. The ratings reflect Kyiv's fragile fiscal capacity, its exposure to refinancing risk on domestic bonds in 2016, limited access to debt capital markets and a volatile macro-economic environment in Ukraine (CCC/C), as noted in a statement published on the agency's website.

Fitch expects Kyiv's finances to remain fragile over the medium term due to the overall weakness of sovereign public finances, the reduced predictability of fiscal policy and a short planning horizon, all exacerbated by the volatile macro-economic trend in Ukraine, according to the report.

Nevertheless, Kyiv's operating surplus widened to 39% of operating revenue at end-2015 from 21% in 2014, according to the agency's preliminary estimates. This followed reduced operating expenditure, high national inflation (estimated at 48% in 2015) and a change of fiscal regulation in Ukraine in 2015, which boosted operating revenue annual growth to an average 38% in 2014-2015, from a negative 22% in 2013.

Kyiv's external debt reduced materially after the city executed an exchange of its $550m eurobonds following a restructuring in December 2015, the agency reports. As the new eurobonds were issued by Ministry of Finance of Ukraine, relieving the city's balance sheet, Fitch says it has withdrawn the senior debt 'D' ratings of Kyiv's eurobonds in December 2015. The city also restructured its domestic bonds in 2015 when Kyiv extended the maturities of its domestic bonds by 12 months, with new maturities coming due on October 10 and December 19, 2016.

The city's outstanding debt as of March 11, 2016 amounted to UAH 2.3bn, following the repayment of series 'F' bonds of UAH 875m and ahead of schedule of series 'H' bonds of UAH 1.975bn, according to the report.

Against a backdrop of potentially volatile finances, the city remains exposed to refinancing risk on its domestic bonds, due to the short-term nature of the debt and limited access to debt capital markets. Offsetting these risks is Kyiv's improved liquidity to UAH 1.6bn at end-2015 from UAH 647m in 2014 following cost optimization and rising revenue from taxes and transfers from the central government. According to its recently updated economic forecasts Fitch projects mild annual growth of the Ukrainian economy in 2016-2017 of 1%-2% after contracting 10.5% in 2015 and 6.8% in 2014, which hampered the city's prospects for economic recovery.